Pillar Two Side-by-Side Package for global minimum tax agreed

Side-by-side (SbS) System

The Inclusive Framework recognises that some states have already implemented their own tax regimes with comparable minimum tax requirements. For multinational enterprises (“MNEs”) in these states, SbS and UPE safe harbours therefore apply if the existing regimes have objectives, intersections and complementary effects similar to the OECD global minimum tax system. 

The main difference between the two safe harbours is that a multinational enterprise group is completely excluded from the income inclusion rule (IIR) as well as undertaxed payments rule (UTPR) of the global minimum tax as part of the SbS safe harbour, while the UPE safe harbour only excludes the jurisdiction of the ultimate parent entity from the application of UTPR top-up tax.
Both the SbS and the UPE safe harbours are applicable to Fiscal Years starting on or after 1 January 2026. The following is therefore important: The USA will also remain completely within the scope of Pillar Two for Fiscal Years beginning previously and will remain being in scope of Pillar 2 QDMTT regimes after.

Side-by-side safe harbour

In light of the complete exclusion of enterprise groups whose ultimate parent entity is resident in a jurisdiction to which the SbS safe harbour applies, the requirements on a Qualified SbS Regime are high. The jurisdiction must include an eligible domestic tax system, and it must also have implemented an eligible worldwide tax system. 

A domestic tax system counts as eligible if it possesses the following characteristics:

• A nominal tax rate of at least 20 percent, taking into account preferential adjustments and sub-national corporate income taxes
• Implements a national (QDMTT) or alternative minimum tax based on financial statement income, applied at a tax rate of 15 percent
• The risk that the multinational enterprise group with an ultimate parent entity in the regime has an effective tax rate below 15 percent may not be material. 

A worldwide tax system is considered as eligible if it:

• Applies comprehensively to all resident enterprise groups and their foreign income
• Incorporates substantial mechanisms which operate unilaterally to address BEPS risks
• Does not present a material risk of effective taxation below 15 percent on the enterprise’s foreign activities.

The SbS safe harbour test should therefore mainly be relevant to US companies, which are expected to be completely exempted from IIR and UTPR for FYs starting after 1 January 2026.

UPE safe harbour

Since the UPE safe harbour only relates to the exemption of domestic profits from the scope of UTPR, the requirements are lower. According to this, the ultimate parent entity of an MNE group must be resident in a country which applies an eligible domestic tax system. Applying a worldwide tax system is therefore not a criterion to apply the UPE safe harbour. 

The requirements on an eligible domestic tax system for the purposes of a Qualified UPE Regime are identical to the criteria for an eligible domestic tax system as part of the Qualified SbS Regime. 

Regardless of the application of the UPE or SbS safe harbour, all enterprise groups continue to be subject to the rules concerning foreign QDMTT.

Simplifications to global minimum tax

Besides the SbS system, the global minimum tax system is to be permanently simplified for the long-term by the following measures:

• The temporary CbCR safe harbour is to be extended by a year (until 2027 or financial year (FY) 2027/28 if the FY differs from the calendar year)
• A permanent simplified ETR safe harbour test is to be introduced (see below for details)
• A programme on further simplifications as part of the full GloBE rules is to be initiated
• Further Guidelines on dealing with technical questions on full GloBE computation

We consider that the introduction of the permanent ETR safe harbour should be of particular practical importance. This includes the following main elements:

Simplified computation of GloBE income:

a. Use of jurisdictional profit before tax based on group financial reporting data (“reporting packages”)

b. Use of “basic adjustments”, which are basically commonly used adjustments to match international tax systems (e.g. participation exemption or add-back of illegal payments and penalties.)

c. Application of sector-specific rules

d. Exemption of OCI or equity reported items (under certain conditions)

e. Simplified presentation of M&A transactions

f. Optional adjustments

Computation of simplified Covered Taxes

a. The basis is current and deferred tax expense according to group financial reporting data

b. Adjustment of tax expense by deducting non-qualified tax credits, taxes on exempted income and non-assessed taxes (“policy-based adjustments”)

c. Exclusion of uncertain tax positions and disallowed accruals

d. Adjustment of deferred taxes by simplified recast, exemption of valuation allowances, simplification of DTL recaptures and on adjusting the tax rate

e. Application of optional adjustment amounts

f. Simplified formation and tracing of deferred tax assets in loss situations

Substance-based tax incentive safe harbour (SBTI SH)

Finally, the OECD paper contains a substance-based tax incentives safe harbour that allows certain qualified tax incentives (particularly expense-based and selected production-based tax incentives) to be treated as in increase in Covered Taxes up to a maximal threshold depending on substance. It is particularly controversial that, depending on situation, the SBTI in the Pillar Two regime should be put in a better position than qualified refundable tax credits under the existing Pillar Two mechanism.

Affected enterprises should study the rules now. 

Since the permanent safe harbour rules already apply from FYs 2026 and 2027 (depending on case) and may be applied even if the transitional CbCR safe harbour test is failed, affected enterprises should start preparing for applying the simplifications as soon as possible. Our contacts below will be happy to help you with your questions.